Fiscal Cliff Talks Remain at Forefront as Stocks Post Weekly Declines
Equity markets posted gains into the close of the week, helping to remove some of the losses posted previously, after the Republican Congressional leadership in the US met with President Obama and later released comments to the media suggesting that the conversations were “constructive.” These conversations were based heavily on the US budget and the question of whether or not each of the major political parties will accept a reasonable balance of spending cuts and tax increases before the end of the year.
Positive stock stories were seen with Alcoa and Home Depot (both higher by 1.5%, encouraging for large companies), and some attention was also given to FaceBook, which rose by 6.3% after expanding its list of retail partnerships that allow its users to buy advertised products and to send them to other users.
Assessing the Downside Trajectory
Negatives were seen with Dell, which dropped by 7.3% after releasing its latest earnings report (which came in lower expectations). A large part of this weakness is being attributed to the tendency amongst electronics consumers to switch from P The largest declines, however, were seen with Sears Holdings, which dropped by nearly 20% after its negative earnings release, as this resulted in the company’s 23rd consecutive decline in quarterly sales.
These negatives helped push the Dow Jones lower by nearly 2% for the week, creating a 4 week string of losses (the worst performance since late Summer in 2011). More broadly, the S&P 500 is now lower by 1.5% since the first half of November, and down 7.5% since the highs seen in October. As long as the “fiscal cliff” discussions continue to be a major aspect of the markets relevant headlines, any rallies are likely to be limited, with major downside still a very real possibility in the medium term.
In addition to the potential economic disruptions that could be caused by the fiscal cliff debate, corporate profits in this years earnings season are expected to slow (especially in the larger companies), Europe’s debt crisis (and Greek stalemate) continues, and economic expansion in China is now seen at its weakest levels in 14 quarters. Economic data this week showed that the Eurozone has entered into recessionary territory for the second time since 2008 (coming on the heels of significant budget cuts for the region). So as long as these stories remain set in the news headlines, general weakness in stocks is likely to continue.
The S&P 500 is coming into some critical levels, as prices are now attempting to bounce off of the 61.8% Fibonacci retracement of the rally from 1260. Thus far, gains have been minimal but traders should wait for a daily close below the 1340 area before getting entirely bearish and looking to establish new sell positions on rallies. In order to turn the bias, we would need to see prices clear the 1400 level, but at this stage this is looking highly unlikely.
About Richard Cox
University Teacher in International Trade and Finance. Specialty in technical/fundamental analysis of the commodities and currencies markets.